Plea To Extend Badla Ban Deadline Turned Down

The Securities & Exchange Board of India (Sebi) has made it clear that it would not extend the deadline of May 31 to disallow badla payments to short-sellers in the modified carryforward mechanism unless these are backed by borrowed securities.

The new rule will be effective from the first settlement in June in the five leading bourses namely Delhi, Mumbai, Calcutta, Ahmedabad and Ludhiana.

The chiefs of these five exchanges had jointly appealed to the market regulator to extend the deadline on the plea that the required software changes to conform to the new Sebi verdict would take some time.

However, Sebi was not convinced with the prayer as the new verdict was announced a fortnight before the proposed dateline, a source in the Calcutta Stock Exchange (CSE) said. The CSE source also said the bourse would introduce the new rule in the first settlement in June although it would face "some technical problems". He added that Sebi might discuss the modalities and finer points of implementing the ban on Wednesday with the stock exchanges.

Sebi introduced the ban on badla payment to short-sellers to create a level-playing field for short-sellers and long-buyers in the carry forward mechanism. However, the issue was blown into a controversy on the grounds that it would give an edge to the automated lending and borrowing mechanism (ALBM), which is currently available in NSE only.

So far badla payment is an incentive to short sellers as it provides them returns for the risk they run by selling shares. They could be hit be adverse price fluctuations and not being paid by the long-buyers. Internationally too, short-sellers are paid interest.

On the other hand, a long buyer could exploit the advantage of the difference on prevailing interest rates and the rate he pays to a short-seller. Sebi made it clear that the move was aimed at encouraging delivery trade, which reached to its nadir recently, and bringing speculative sellers on par with speculative buyers.